Article No. 300

Business Practice Findings, by James Larsen, Ph.D.

Creating Legitimacy

New research explores how entrepreneurs mold perceptions to acquire resources for their businesses.

"What did you say the name of your company was again?”

Entrepreneurs recognize this question. It’s a code, and it stands for a different question. The actual question is “Are you legitimate?” “Should I take you seriously?” “Are you wasting my time?”

The rules of the code are clear, and there’s only one answer to give, the firm name. There’s a moment’s pause, and then the person answers. It’s either: “Oh, yes, I recognize you,” or it’s a brush off: “I don’t think we’re interested today.”

The difference is staggering, and it was this difference that Christoph Zott (from INSEAD in France) found in a recent study of entrepreneurial success.

Zott conducted a unique exploratory study in which he contacted 230 recent graduates from the MBA program at London Business School. He asked if people had recently started new businesses or were planning to do so in the next six months. Eventually, he pared his study down to seven firms that represented two extremes of success in attracting resources for new businesses. For his purposes, resources means quality employees, quality board members, customers, and financial backing. He reasoned that the first step in company building was an idea. The second step was formulating a business plan, and the third step was attracting resources that would provide the pieces that entrepreneurs could use to carefully piece together a viable firm. It was the third step he was interested in watching, and he spent two years doing it.

Zott found that the key was legitimacy. Crucial resources are the payoff for establishing legitimacy, and legitimacy is created in the minds of potential stakeholders through the careful manipulation of images and symbols by entrepreneurs. Entrepreneurs who were most active in fostering the perception of legitimacy were the most successful in attracting resources for their firms. Those entrepreneurs who were less active attracted considerably fewer resources and thereby handicapped their new companies.

Zott worked from a multi-part definition of legitimacy. Basically, legitimacy is the perception that an entrepreneur and his company have a useful contribution to make and that constructive reactions are appropriate. There are six distinct kinds of legitimacy, and entrepreneurs need to shape perceptions of all six.

Cognitive legitimacy leads people to the conclusion that the entrepreneur is intellectually capable and knows how to apply the most effective managerial techniques in company building. Entrepreneurs in Zott’s study created this perception by making sure people knew they had graduated from a top business school. They also polished their appearance and their presentations of their new firms for potential stakeholder groups.

Personal legitimacy leads people to the conclusion that the entrepreneur, his employees, and his board members are committed to the firm and won’t jump ship when difficulties arise. Entrepreneurs in Zott’s study created this perception by working without pay, and when employees agreed to forego pay or defer pay, then the message of commitment was driven home even more strongly.

Structural legitimacy reassures stakeholders that formal structures and processes of competent management are in place. Zott cited several examples: incorporation, stringent hiring practices, formal roles within the firm, e.g. CFO and HR, attractive websites, and dress codes for employees. These are symbols of a professionally run company.

Consequential legitimacy calls attention to milestones of progress. These can include industry awards for innovation, working prototypes, demonstrations, trial sites, adoption of the firm’s products or services by important customers, a prestigious office address, anniversaries of years of operation, new growth in employees, and recognition of the entrepreneur by industry groups, e.g. being asked to address a conference as an expert.

Dispositional legitimacy is the attribution of good character that allows a new firm to appear decent, trustworthy, or wise. For new firms, this is best accomplished by trading on the reputations of its key people in previous endeavors. Character references also fall into this category.

Exchange legitimacy is a recognition that the contribution a firm will make is valuable, that the groups that will benefit the most from it should take it seriously, and that the firm is responsive to the needs and interests of these groups. One example Zott cited for molding this perception was winning certification contests.

In the business of company building, a new idea, a unique technology, an untapped niche, and all the other innovations that attract entrepreneurs, are only tickets to the game. They only give entrepreneurs a place to start. Attracting committed employees, board members, customers, and financing must occur quickly for entrepreneurs to successfully build viable firms. Zott found that those entrepreneurs who were most active and used the widest variety of actions to mold perceptions of legitimacy were strikingly more successful in gathering the resources their young firms needed to grow and prosper. He also found that once legitimacy is accorded a new firm, it is not reexamined unless some extraordinary circumstance warrants it.

So, pay attention to perceptions of legitimacy. This is the crucial lesson that the owners of new firms need to heed from Zott’s research.